MC Construction Business Structure & Improvement, November 2010

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  • Today I am going to present an evaluation of MC Construction Consultants, Inc. business structure and recommendations for improvement.
  • They have expertise in design, permitting and land development and have won multiple awards for the design and construction of energy efficient Built Green® custom homes.MC designs and builds homes that reflect their customers’ personal lifestyle and suits their individual needs and preferences.
  • Over 25 years of unique designing, building and craftsmanship has earned MC Construction an outstanding reputation as the premier custom home builder in the South Puget Sound area. Their custom homes are functional, durable and visually pleasing. Efficient floor plans offer creative solutions to maximize space, usage, and storage in trademark MC style.
  • The Financial Perspective measures the success of the company to turn a profit, provide a return on investment to investors, and the company’s overall goals and objectives relating to its customers and suppliers, internal processes, and employees.The Customer Perspective measures customer satisfaction and increasing market share and penetrating new markets.The Learning and Growth Perspective measures the intangible drivers of future success such as the employees, the organization and information. The Internal Business Perspective measures the internal goals of the company, outlining the strategies, processes, and programs necessary to meet customer objectives.
  • Financial - Accurate budgeting and monthly job cost reports are critical because financial reports are after the fact and do not help in day to day decision making.Customer - They have an employee whose primary job is to keep contact with customers through all stages of construction, provide reassurance, and aid in their finish choice decisions.
  • Internal - These factors include timeliness, attentive to the homebuyer’s needs, and quality construction and materials. The marketing department works closely with the design department to identify and promote new projects and services provided. The sales team is experienced in maintaining market leadership.Learning & Growth - Ongoing training and job growth has not been a major focus.
  • MC has built and maintains their reputation by continually striving for excellence in materials, methods and service. The company’s staff holds decades of experience and expertise, and dedicate themselves to providing outstanding customer service at every point of contact. Financial – The company stands behind their work, offering a complete warranty and priority service plan on every project.Customer – Staff strive to ensure that their customers enjoy the custom home building process as well as their completed home. Internal Business - This unique construction process allows flexibility to accommodate changes during the building of the custom home. Learning & Growth - This will be addressed further in recommendations below.
  • MC has built and maintains their reputation by continually striving for excellence in materials, methods and service. The company’s staff holds decades of experience and expertise, and dedicate themselves to providing outstanding customer service at every point of contact. Financial – The company stands behind their work, offering a complete warranty and priority service plan on every project.Customer – Staff strive to ensure that their customers enjoy the custom home building process as well as their completed home. Communication is vital during the construction of a custom home. Internal Business - This unique construction process allows flexibility to accommodate changes during the building of the custom home. Learning & Growth - This will be addressed further in recommendations below.
  • MC is well known in the custom homes market in Western Washington and has a steady stream of clientele.
  • “The National Association of Home Builders pegs labor's share of the cost of a new home at 20 to 25 percent.” (JD Power’s 2006) The company personnel counts 200 employees.A significant expense for any construction company is their employees, contractors, and subcontractors. Or would shave half a percentage point off the builder's 12 percent average profit margin.
  • MC excels in design, selection and management of subs/suppliers, and has a good reputation for standing behind their product if issues or concerns arise.Quality -   High rating in quality is a requisite to maintaining a reputation as a custom home builder.  Customer satisfaction has significant direct relation to profitability as dissatisfaction requires additional uncompensated work or affects reputation. Environmental - Marketing to customers and working with vendors and contractors relies on reputation, track record and quantity as one of the largest volume and longest standing custom builders in the Pacific Northwest. 
  • PET - Managed through realistic scheduling and communication of effect of decision on timing. MC consistently meets project schedules. (i.e. Things take longer than would be desired. Marketing - Community presence and word of mouth as established, high-profile builder is the most successful and important source of new and return customers.Other mediums - participation in professional associations, vehicle and jobsite signage; distinguished community presence; and advertising including signage print and occasional radio supplements recognition. 
  • As with many companies, “laypersons” work their way up the ladder and eventually end up in a managerial or supervisory role. These higher level employees have the know-how for construction and working with vendors, but in most cases do not have the skills and abilities to manage people. From the Learning and Growth perspective, the company must invest in knowledge and job growth of key staff that are promoted into management positions, but have very little managerial experience. This causes issues for both the employees they supervise and the company executives. Without proper managerial training on such things as supervisory, hiring and firing, sexual harassment, discrimination, etc., these site supervisors are a lawsuit just waiting to happen.
  • According to Managerial Accounting and Statistics, there are three significant success factors: 1) efficient and effective use of employees; 2) increasing information systems capabilities; and 3) improving quality. MC focused on the first factor when measuring their success. They looked at employee satisfaction, turnover rate, and employee empowerment.To measure the success of internal business processes, MC looked at internal administrative costs due to mistakes entering cost codes, processing job site paperwork, and handling personnel forms. Understanding not only the external building process – working with suppliers and contractors – but also how the company processes billings, works with clients, markets the product, and achieves its mission are all critical to the success of these employees.
  • The company owner and the CFO will make the final decision as to which approach will be most beneficial and cost effective based on the decision models below.
  • They have been in business for over 20 years and have continued to grow and increase profits in spite of these occasional setbacks.AdvantageThe estimated cost per year to the company for site supervisors and managers errors due to lack of training is $6,000. This includes materials, staff time, and associated fees or fines.However, this option could be more cost effective when compared to the other two options which range between $3,400 - $15,945 to implement (this includes training and time loss costs).DisadvantageThe problem with not making any changes is that the poor leadership and costly mistakes will continue to happen. HR continues dealing with preventable discipline issues; budget and accounting continues dealing with cost overruns and incorrect paperwork; employees continue dealing with inappropriate and inexperienced supervisors. All this can lead to high employee turnover; and dissatisfied customers whose homes do not meet the timeline due to the site supervisors’ errors.  
  • The positive effect to the company with the first part of the option is a more cohesive workforce that feels connected to the company on all levels. And, with the addition of part two, there will be well-trained supervisors, less mistakes made and complaints filed, as well as reduced employee turnover. The downside is the cost to provide trainings and time lost while employees are going through the training(s).
  • A second part of the program could be extended to those employees who show potential for promotion that covers project management and supervisory skills. The estimated cost would be $2,500 for five employees to attend an additional three day training at $500 per employee. Based on the same salary average, the additional time loss cost would be approximately $2,811. The estimated total cost to the company for this option would be $5,311.Or, the owner could choose to just provide part two to a few employees who show growth potential.
  • AdvantageAgain, the obvious positive effect to the company is more professional, knowledgeable managerial staff. They will have a better understanding of their important role in the organization. DisadvantageThe cost to provide management training is a significant factor in the decision. The estimated cost for a five-day management training course for all seven supervisors/managers would cost $7,000 ($1,000 per employee for the training). In addition, the estimated time loss cost based on an average salary of $229.17 for five days would be $8,020.95.If the owner chose the second part of this option and only trained the new managers as they promote in, there would be a significantly lower cost, but this would not completely solve the problem of the more long-term supervisor’s lack of knowledge and continuous errors. Of the seven managers/supervisors that are currently employed, three have just been promoted into their positions within the past nine months. Based on just providing the training for these employees, the estimated cost (using the same salary average) would be $3,437.55.As with option two there is the expectation that if supervisor behavior improves than employee turnover will go down – this is a significant cost savings. HR and the finance division will also benefit from better trained managers.
  • Given the three decision alternatives and the two states of nature, strong owner support or weak owner support, we see that choosing d3 – grooming employees for advancement - has the greatest expected value for the company because it has the lowest cost associated with implementation.
  • The decision tree has four nodes numbered 1-4, that represent the decisions and chance events. Squares are used to depict decision nodes and circles are used to depict chance nodes. The branches leaving the decision node correspond to the decision alternatives.The branches leaving each chance node correspond to the states of nature.The payoffs are shown at the end of the states-of-nature branch.In this case we are looking at the costs incurred for each decision and see that d3 Training Managers has the greatest payoff because it is the most cost-effective way to handle the situation.
  • MC Construction Consultants, Inc. excels in retaining the high-end, custom home market in their region, due primarily to their reputation for excellent customer relations. The company has developed an effective and efficient budgeting, tracking and accounting system. However, the two areas needing improved strategies to propel the company to the next level are internal processes and employee learning and growth.
  • There is a cause and effect relationship between more knowledgeable employees about processes and that of internal performance. And, in reverse, improved internal processes will help employees be able to better understand and follow them.The best choice for MC is to invest in their employees as a whole, with additional training offered to those who choose to be on the management track. The costs are relatively low, with the biggest concern being the time spent away from the office.
  • Special thanks to MC Construction Consultants CFO Steve Yester and Financial Controller Leanne Yester for providing me the information needed to evaluate and make recommendations for their company.
  • MC Construction Business Structure & Improvement, November 2010

    1. 1. Business Structure &Recommendation for Improvement Catherine J. Tedrick November 23, 2010 GB519-02: Measurement and Decision Making Professor Crystal Gifford Kaplan University
    2. 2. About MC Construction MC Construction Consultants, Inc. develops, designs and builds custom homes in Western Washington. The company’s primary market niche is building high-quality, custom built homes in exclusive communities for high-end homebuyers.
    3. 3. Customer Service MC’s greatest strength is personally taking each homeowner through every phase of their project. They customize a design to fit their customer’s lifestyle and budget while:  Coordinating with their financial institution to handle financing.  Professionally managing the project.  Offering a complete warranty and priority service plan.
    4. 4. Balanced Scorecard Evaluation MC’s Balanced Scorecard reflects a healthy company that is financially sound and customer-driven. The following perspectives were examined:  Financial  Customer  Internal Business  Learning and Growth
    5. 5. MC Perspectives Financial Internal monthly and published consolidated quarterly reports are created. Customer Customer satisfaction is a huge factor since MC’s business is largely driven by referral.
    6. 6. MC Perspectives (continued) Internal Business The company developed an internal business process for addressing factors that have the greatest impact on customer satisfaction. Learning and Growth Employees hired for specific positions are required to have certain experience and education.
    7. 7. Critical Success Factors and Company Performance Financial  Working together with customers and subcontractors is vital in creating a smooth building process.  They stand behind their work, offering a complete warranty and priority service plan on every project. Customer  MC’s professional staff are experts in the important areas of design, estimating and customer service.  Communication is vital during the construction of a custom home.
    8. 8. Critical Success Factors and Company Performance (continued) Internal Business  MC has a successful process for tracking account codes for each project.  The Project Manager develops the budget and all costs then enters all budget codes into the system to be monitored and updated by the accountant as work progresses. Learning and Growth  Being a relatively small, family owned and operated business, little resources have been put into learning and growth.
    9. 9. Projected Earnings MC offers complete homebuilder services for projects priced between $350,000 - $500,000. On average, the company has 10-12 projects going at once. The annual amount of work completed by the company is nearly $5 million.
    10. 10. Significant Costs A 12 percent gross profit margin is built into the budget but fluctuates based on how closely supplies and labor cost are in line with the initial budget. For a typical home built by MC that sold for $425,000, about $106,250 went for construction labor. If, hypothetically, wage levels rose by a third, that would add around $2,500 to the cost of the typical house.
    11. 11. Nonfinancial Measures The following nonfinancial measures evaluate the company’s level of productivity and its relation to profitability:  Quality Production staff maintains a focus on quality in design, selection of suppliers/contractors, supervision of work and warranty care.  Environmental MC has very good systems in place to deliver products and services.
    12. 12. Nonfinancial Measures Productivity/Efficiency/Timeliness  Critical to the construction industry, this requires management of variables as well as customer expectations Marketing Effectiveness  Marketing strategies include reliance on word of mouth fostered by maintaining relations with prior customers through extended warranty care and through the typical mediums.
    13. 13. Significant Issues Though MC has an effective and efficient budgeting, tracking and accounting system, putting effort into growing employees and improving internal business processes must be addressed. The company needs to invest in knowledge and job growth of key staff that are promoted into management positions, but have very little managerial experience.
    14. 14. Significant Issues MC discovered through the Balanced Scorecard that their Internal Business environment is directly tied to learning and growth of managers and supervisors.  There is a disconnect between doing the job and understanding processes necessary to be productive, efficient and cost effective.  Managers must understand how the company processes billings, works with clients, markets the product, and achieves its mission.
    15. 15. Decision Alternatives MC Construction has three options for addressing the issue of inexperienced and untrained supervisors: 1. Status Quo 2. Grooming 3. Manager Training
    16. 16. Decision 1: Status Quo The company can continue to handle this situation by addressing each incident separately as they arise.  Advantage o Though the estimated cost per year to the company for site supervisors and managers errors due to lack of training is $6,000, this option could be more cost effective when compared to the other two options.  Disadvantage o Poor leadership and costly mistakes continue to happen. o Preventable discipline issues; cost overruns and incorrect paperwork; and employee turnover continue to happen.
    17. 17. Decision 2: Grooming Develop program that gives all employees a basic foundation for the goals and mission of the business; what each department does; and how each effects the other.  Advantage o More cohesive workforce that feels connected to the company on all levels. o Better prepared for job growth and larger pool for management to promote from.  Disadvantage o Estimated total cost to the company would be $15,945.60: – $7,700 for all 22 employees to attend a two-day training at $350 per employee. – Time loss cost of $8,245.60 based on an average salary of $187.40 per day.
    18. 18. Decision 2: Grooming (continued) Offer an additional advanced project management and supervisory skills training for employees showing leadership potential. o The estimated total cost to the company for this option would be $5,311. – Estimated total cost of$2,500 for five employees to attend an additional three day training at $500 per employee. – Time loss cost of $2,811 based on the same salary average.
    19. 19. Decision 3: Manager Training Provide training to managers by one of these methods: 1) Train all managers – new and longtime; or 2) Just train new managers as they promote in.  Advantage More professional, knowledgeable managerial staff with a better understanding of their important role in the organization.  Disadvantage The cost to provide management training is a significant factor in the decision. o Estimated cost for five-day management training for all seven managers is $7,000. o Estimated time loss cost based on an average salary of $229.17 for five days is $8,020.95.
    20. 20. Payoff Table State of Nature Strong WeakDecision Alternative Owner Support, s1 Owner Support, s1Do nothing – status quo, d1 6 16Groom employees for advancement, d2 15 5Train newly promoted managers, d3 8 3 Expected Value (Cost to Company)With an initial subjective probability of .8 that support for the option will be strongP(s1) and a corresponding probability of .2 that support will be weak P(s2), the payoffvalues were used to compute the expected value (cost to company) of the threedecision alternatives:EV(d1) = .8(6) + .2(15) = $7.8 EV(d2) = .8(15) + .2(5) = $13 EV(d3) = .8(8) +.2(3) = $7
    21. 21. Decision Tree
    22. 22. Recommendations Propose changes in two perspectives:  Internal Business Process perspective Cost of the project’s direct impact on the level of operating efficiency and reduce unnecessary administrative and labor costs.  Learning and Growth perspective Invest in knowledge and job growth of key staff who are promoted into management positions, but have very little managerial experience.
    23. 23. Recommendations Train all new managers as they promote.  Give new manager tools and knowledge to be successful.  Lower employee turnover. Offer career development training for all employees interested in job growth within the company.  Have a holistic view of the company.  Better prepared for positions that open in the future.
    24. 24. ResourcesBalanced Scorecard Institute. What is the Balanced Scorecard? Retrieved from www.balancedscorecard.org/BSCResources/AbouttheBalancedScorecard /tabid/55/Default.aspxKaplan, R., Norton, D. Value Based Management. Retrieved from www.valuebasedmanagement.net/methods_balancedscorecard.htmlJackson, S., Sawyers, R., Sweeney, D., Anderson, David. Managerial Accounting and Statistics. Chapter 2: Performance Evaluation Using the Balanced Scorecard, pp44-46MC Construction Consultants, Steve Yester, Chief Financial Officer; Leanne Yester, Financial Controller, MC Construction Consultants, Inc., www.mcconstruction.com

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